Vuzix Corporation

Greetings and welcome to the VU6 first quarter ending March 31st, 2022 financial results and business update conference call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the call, please press star zero on your telephone keypad. As a reminder, this call is being recorded. Now, I would like to turn the call over to Ed McGregor, Director of Investor Relations at Vucic. Mr. McGregor, you may begin.

Good afternoon, everyone, and welcome to Vucic's first quarter of 2022 ending March 31st Financial Results and Business Update Conference Call. With us today are Vucic CEO, Paul Travers, and our CFO, Grant Russell. Before I turn the call over to Paul, I would like to remind you that on this call, management's prepared remarks may contain forward-looking statements. which are subject to risks and uncertainties and management may make additional forward-looking statements during the question and answer session. Therefore, the company claims the protection of the safe harbor for forward-looking statements that are contained in the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from those contemplated by any forward-looking statements as a result of certain factors including but not limited to general economic and business conditions, competitive factors, changes in business strategy or development plans, the ability to attract and retain qualified personnel, as well as changes in legal and regulatory requirements. In addition, any projections as to the company's future performance represent management's estimates as of today, May 10, 2022. USICS assumes no obligation to update these projections in the future as market conditions change. Today's call may contain certain non-GAAP financial measures. When required, reconciliation to the most directly comparable financial measure calculated and presented in according with GAAP can be found in the company's Form 10-Q filing at sec.gov, which is also available at www.vuzix.com. I will now turn the call over to Vuzix CEO, Paul Travers, who will give an overview of the company's operating results and business outlook. Paul will then turn the call over to Grant Russell, Vuzix CFO, who will provide an overview of the company's first quarter financial results Paul will then return to provide some closing remarks, after which we'll move on to the Q&A session.

Paul? Thank you, Ed. Hello, everyone, and welcome to the Vuzix Q1 2022 conference call. On this call, we're going to review our results and recent developments and then give you some perspective on where we see things headed. The first quarter of 2022 was a challenging one for Vuzix, our customer suppliers, and partners due to the obvious combination of macro conditions related to COVID and geopolitical tensions in Europe. These issues generally and their impact on timing related to certain anticipated customer orders resulted in our Q1 revenue falling short of expectations. Revenue growth and profitability are important objectives for Vuzix. That said, the AR industry is at its early beginnings and as such difficult to predict month to month and even quarter to quarter frankly. But the underlying trends and communications from our key accounts reflect indications of growth that the industry expects. We remain focused on delivering value-added hardware and solutions to our customers base and expanding our global sales channel and sales teams in select high growth regions to support our core product offerings. At the same time, we continue to prepare the company for our growth by investing in our core technologies, including wave guides and display engines, as well as our manufacturing capacity. These investments will enable us to better address and support the expected broad industry growth, including in and around the metaverse that is projected to ultimately span the enterprise defense and consumer markets. For the reasons just stated, total first quarter revenue was $2.5 million, a decline of 36% compared to the prior year. Historically, Q1 for Vuzix has been our slowest quarter of our typical fiscal year, with the exception of 2021 when Q1 represented record product sales for Vuzix. We consider these results to be anomalous and largely associated with timing delays of customer rollouts and the general world market conditions mentioned above. By way of example, if just two key accounts were not pushed out, our first quarter numbers would have met or exceeded consensus street expectations. Further, from a customer engagement perspective, the first quarter was encouraging across our core smart glasses business with the M400 continuing to be our flagship offering. During the quarter, we continue to expand our international sales channels and work diligently with our key independent software vendors to support the needs of our collective customers as they work through final optimizations ahead of expected enterprise-wide rollouts. On the OEM side of the business, upon which I'll expand shortly, there is growing momentum with existing and new customers, none of which was reflected in our first quarter revenue number. We feel that visibility into our smart glasses customer base and their commitment to product rollouts is improving. Despite the numerous current headwinds, we still expect our core smart glasses revenue in 2022 to grow over 2021, driven primarily by larger deployments within logistics and warehousing, but also by steady expansion within healthcare. We have a growing number of customers in the warehousing and logistics space well along in their implementations. Feedback from our largest customers in this space remains very positive and additional units continue to be ordered, deployed, and software fine-tuned in preparation for company-wide rollouts. These rollouts are in some cases within critical infrastructure areas for many of these companies And with the global challenges stressing their businesses, both from supply and labor force challenges, they are being extremely cautious to make sure there are no glitches that might impact their business as the rollouts commence. All of our major healthcare ISVs continue to expand the availability of their Vuzix powered surgical solutions. Last month, Medacta launched their NextAR shoulder augmented reality surgical platform in both Europe and the US. In March, Pixie Medical announced the commercial launch of its Mi Plus AR computer-assisted orthopedic solution in the U.S. This solution was launched commercially in January 2022 in both Europe and Australia. Rods and Cones is now active in more than 600 hospitals across more than 30 countries. Ohana One with Teleview are also expanding their network, and over the last month, they joined Vuzix in donating their solution both time and remote software with our donation of M400s to Ukraine hospitals to help support the needs for medical assistance. Beyond these firms, we continue to see our glasses showing up almost daily across social media and more and more hospitals around the world. Most recently, Rene University Hospital in France and Osaka Saseikai Izuo Hospital in Japan. We anticipate healthcare in 2022 will be another solid growth contributor for Vuzix. Overall, our sales pipeline for 2022 remains healthy, and our biggest challenge is managing and understanding customers' expectations around the timing of deployments from these key accounts, movement of which can have a material impact on our quarterly sales. Again, despite Q1, we expect our full year smart glasses revenue for 2022 to grow significantly over 2021, especially as we move through the back half of the year. During the first quarter, We also remained very active in terms of pursuing numerous strategic and key initiatives that should drive the transformation of Vuzix. On the acquisition and investment front, Vuzix continues to be engaged with several companies that could broaden our service offerings across key market segments and broaden our technical capabilities and know-how. As a result of internally driven initiatives and potential acquisitions, We expect Vuzix to shift from being primarily an enterprise smart glasses supplier to a more diversified supplier of smart glasses, SaaS-based solutions, and OEM components and products for the broader markets. On this front, we are planning to hold a conference call early next week to provide an update on developments in this area. It will be open to everyone, so please set aside some time to join the call and learn more. To support the number of inbound requests for access to Vuzix technology, and to proactively offer it to third parties primarily in the broader markets, we created a standardized OEM platform. This new platform, announced last week, meets the increasing market demand for our technology and the coming need for high-volume waveguide manufacturing capabilities to support these broader markets. As a U.S.-based manufacturing company, Vuzix has a competitive advantage in the core technology to offer solutions to the U.S. military and allied foreign defense markets. We continue to make significant improvements in our waveguide manufacturing quality and our ability to produce at scale at what we believe could be the industry's lowest cost and highest performing solutions available. The total addressable market for waveguides is expected to be in the billions of units annually within five years. Vuzix, with our OEM platform and high-volume manufacturing, is preparing to deliver to this broader market opportunity through large defense, consumer, and industry third-party partners. We are now seeing ever-growing customer interest and orders from aviation and defense customers for head-worn wave guides and display engines. At this juncture, Vuzix has expanding relationships with five major defense contractors, and we are receiving RFPs from new and existing customers alike. There has been a lot shared in the public domain regarding the U.S. Army's IVAS program and some of the challenges the program has faced. The U.S. Army is clearly committed to wearable displays but have publicly made the point that they are rethinking the best path to success. We believe this rethink has been helping Vuzix to foster business relationships with key defense contractors in order to explore new solutions. The ultimate goal for Vuzix from these defense-related OEM programs is qualification and selection into volume programs which typically range anywhere from hundreds to even hundreds of thousands of units over the course of the widely deployed program, which are typically spread out over three to five years and can take several years to be qualified. FUSIX is well underway with several of these programs and is expecting initial volume deployments as early as this year. As a reminder, in five weeks, the expiration of our non-compete related to the defense markets will expire. This will allow Vuzix to directly engage with any U.S. or allied defense and homeland defense forces around the world. This should make a big change for how Vuzix will be able to conduct its business in the defense markets going forward. Leading consumer customers are also approaching Vuzix, driven by new interest in the level of performance we have achieved with our Shield next-generation smart glasses. To reiterate from the experts at Yole, The shield was by far my most convincing visual experience of any type of AR glasses so far. Besides being comfortable to wear with a good weight balance, the image was crystal clear with no haze nor artifacts. Between the display, the waveguide optics, and the projection module, Vuzix have done a remarkable job of optimizing performance and quality. Our strong IP portfolio and the ability to produce these components efficiently in volume with price points significantly lower than other competitors is opening these new doors. The consumer smart glasses market requires products that can meet specific price points and volumes. In the end, competing companies can make hero devices or one-off prototypes. However, producing them in high volume and at price points that fit the broader markets is very difficult and we feel that Vuzix has the best recipe. Vuzix has the waveguide production capacity now to meet the level of volumes required for both internal and current external programs. To deliver against expected future demand, we are expanding our facilities to address the ability to manufacture the millions of units of waveguides associated with the business we see coming. This is an effort that has been underway for some time now at Vuzix with our newest production line well underway. We will be sharing more on this in the coming few months. In summary, business activities, announcements, and ultimately revenue from our OEM business group is expanding and we expect it to grow significantly over the course of 2022 and beyond. Vuzix has three next generation products to be released over the next several months. Supply chain and staffing resource challenges in 2022, have negatively impacted the timeline related to the induction of these new products. But despite these challenges, our teams are managing our delivery and project schedules accordingly, and we expect the three new products to enter production just a few months behind schedule. Fuzix Shield is far advanced versus the competition, and its form and functionality have garnered significant early interest from enterprise customers that require a more traditional eyeglass form factor and capabilities afforded to them by the shield to solve operational challenges. Commercial production of the first shield model is now expected to commence in the third quarter of this year with enhanced versions being introduced when components are available, including ultimately full color. The Vuzix M400C, which is effectively on schedule, is our second generation USB-C based Windows PC and phone compatible smart glasses. They take full advantage of the robust design and camera afforded by the Vuzix M400, including IP67 ruggedness. We have shipped a limited number of initial production units of the M400C to a Windows mobile computer manufacturer, and we anticipate their first volume production orders will be received by the end of the second quarter of 2022. We expect to introduce the M400C to our standard channels also in this quarter. Vuzix is also working on a new follow-on waveguide-based smart glasses product that will feature our latest advanced waveguide optics, a larger field of view, and have the ability to run Android 11 out of the box. We believe this new product will answer the call for many of our enterprise customers that love the blades form factor but require an upgraded OS to support their application architecture. We expect the formally announced and commenced volume production of this follow on based wave guide product in Q3 of this fiscal year, barring any last minute supply chain issues. Finally, we have been diligently working on our first Vuzix developed SaaS based solution built on the Microsoft Azure platform. We expect we'll begin data testing for the first customer feedback over the summer. We will share more on this when we formally release this solution to the markets. I'd like to now pass the call over to Grant for his financial review. Grant.